Bitcoin price corrected, but bulls are positioned to profit in Friday’s $580M BTC options expiry

Bitcoin (BTC) price has held above $20,700 for 4 days, fueling bulls’ hope for another leg up to $23,000 or even $25,000. Behind the optimistic move was a decline in inflationary pressure, confirmed by the December 2022 wholesale prices for goods on Jan. 18.

The United States producer price index, which measures final demand prices across hundreds of categories also declined 0.5% versus the previous month.

Eurozone inflation also came in at 9.2% year-on-year in December 2022, marking the second consecutive decline from October’s 10.7% record high. A milder-than-expected winter reduced the risk of a gas shortages and softened energy prices, boosting analysts’ hope of a “soft landing.” According to analysts, a soft landing would avoid a deep recession and possibly convince central banks to curb their interest rate hikes.

This week’s Jan. 20, $580 million BTC options expiry looks like an easy win for bulls because the surprise 7-day 23% rally above $21,000 caused most bearish bets to become worthless. The recent move has holders (or hodlers) calling a market bottom and the potential end to the bear market, but the options market might hold the answer.

Can Bitcoin options help bulls secure the $20,000 floor?

It might seem like distant reality right now, but Bitcoin was trading below $17,500 just 7 days ago. As the weekly options expiry on Jan. 20 approaches, the bullish bets are about to pay off, while bears will see their options becoming worthless as the deadline looms over them.

Bears’ main hope is the possibility of the U.S. Federal Reserve (FED) raising interest rates by 50 basis points at the next meeting, but that will only happen on Feb. 1. The latest data on U.S. retail sales have shown a 1.1% retreat in December, the second consecutive spending cut. The odds are increasingly favorable for a 25 basis point interest rate increase, signaling that the central bank’s effort to curb inflation is achieving its expected results.

If bulls win on Jan. 20, they will likely add buying pressure and fuel the $20,000 support level.

Bitcoin bears were caught entirely off-guard

The open interest for the Jan. 20 options expiry is $580 million, but the actual figure will be lower since bears were decimated after Bitcoin breached $20,000. Bulls are in complete control, even though their payout becomes larger at $21,000 and higher.

The 1.18 call-to-put ratio reflects the imbalance between the $150 million call (buy) open interest and the $125 million put (sell) options. If Bitcoin’s price remains above $17,000 at 8:00 am UTC on Jan. 13, less than $2 million worth of these put (sell) options will be available. This difference happens because the right to sell Bitcoin at $16,500 or $15,500 is useless if BTC trades above that level on expiry.

$21,000 Bitcoin would give bulls a $220 million profit

Below are the three most likely scenarios based on the current price action. The number of options contracts available on Jan. 20 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

Between $19,000 and $20,000: 7,500 calls vs. 1,700 puts. The net result favors the call (bull) instruments by $110 million.
Between $20,000 and $21,000: 800 calls vs. 8,100 puts. The net result favors the call (bull) instruments by $165 million.
Between $21,000 and $22,000: 10,600 calls vs. 200 puts. The net result favors bulls by $220 million.

This crude estimate considers the call options used in bullish bets and the put options exclusively in neutral-to-bearish trades. Even so, this oversimplification disregards more complex investment strategies.

For example, a trader could have sold a call option, effectively gaining negative exposure to Bitcoin above a specific price, but unfortunately, there’s no easy way to estimate this effect.

Bitcoin bears need to push the price below $20,000 on Friday to minimize the loss. On the other hand, the bulls can double their gains by pumping the price above $21,000 on Jan. 20 and profiting by $220 million.

The 7-day rally toward $21,300 liquidated $1.2 billion worth of leverage short (sell) futures contracts, so they might have less margin required to subdue Bitcoin’s price.

For now, bulls are well positioned to profit from the BTC weekly options expiry and use the proceeds to defend the $20,000 support.